This post was just published on ZYX Short Sell Change Alert.
From a fundamental perspective, there is nothing new since the last update. From the trading data we can share the following:
- Occasionally, there is light selling by Smart Money.
- Corn prices continue to be low. Corn prices are important because they are the primary feed for chickens.
- Short interest has fallen by about 30% and now stands at 4.8% of the float. This reduces but does not eliminate the probability of another short squeeze.
Our speculation is that TSN is itching to do another acquisition similar to HSH. The thinking may be that if the stock market thinks of TSN as a packaged food company, it will get higher multiple. To anyone looking at TSN objectively, it is obvious that even a good sized acquisition is not going to put TSN in the league of pure packaged food companies.
The First Problem
The first problem with the position is technically oriented investors who know less or do not care about fundamentals. Such investors ran up TSN to its present price based on momentum. If there is a breakout from the present price range, such investors will claim that TSN formed a based and the breakout is a time to buy. The buying frenzy by these investors can easily run the stock up to $80.
It is important to note that there are many knowledgeable investors in the market who understand the folly on buying purely on momentum and technical patterns. However most institutional investors cannot short sell. So it comes to hedge funds to counter the insanity. In the scenario of another breakout, will hedge funds short more? The answer is undeterminable at this time because hedge funds have suffered major losses on many positions recently and appear to be shy about taking new large short positions.
The Second Problem
The position size was appropriate when initially taken. However in view of the fact that the stock has hung in there, the present position size is too large.
TSN reports earnings on May 9, 2016. The plan is to reduce the position size, even if it means taking losses by April 30th, to less than 50% of the full core position size. Those who want to take less risk may consider even further reduction.
The best way to reduce the position is to slowly scale out on days when the stock is down.
Also consider watching PPC and SAFM to help guide scaling out. These two stocks have a considerable overlap with TSN.
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